would now like to turn the conference over to Mr. Milos Tsulisic, CEO and Managing Director. Please go ahead.
Good morning, everybody. Thank you, and thanks for joining us to discuss Mystate's results for the first half of twenty twenty one. I'm Milos Sulisic, Managing Director and CEO. And joining me in a state of un lockdown in Melbourne is Gary Dixon, our CFO. We'll speak to the investor presentation lodged with the ASX earlier this morning, which is also available on the MyState Limited website.
I'll provide a brief business update before handing over to Gary, who'll take you through the financials in more detail. And then I'll come back and outline our strategic priorities before finishing with our growth outlook. And as usual, we welcome any questions at the end. So first to the highlights. And on slide 4, you can see that Mystate delivered an outstanding result for the first half of the twenty twenty one financial year.
Our results underline the effectiveness of our strategic focus. Firstly, driving strong customer acquisition. Secondly, increasing investment in digital innovation. Thirdly, managing our operating expenses. And fourthly, and most particularly, whilst maintaining a culture based on simply delivering great customer experiences.
We'll provide evidence of these in the presentation this morning. As you can see on slide 4, our headline KPIs are all strongly heading in the right direction. Core earnings, that's earnings before tax, provisions and restructuring costs, were up nearly 19 percent to $26,400,000,000 in the half, accelerating our road of growth over the year before. Statutory net profit after tax increased 12.6 percent to $17,000,000 and earnings per share increased 11.6 percent to $0.1848 per share. This is despite incurring one off restructuring costs of $2,500,000 in the period.
Operating expenses were again managed carefully leading to the cost to income ratio, excluding restructuring costs, decreasing by 3.40 basis points to 61.5%. Customer deposits were up 5.1% in the last 6 months alone, helped by our award winning MyState Bank bonus saver account with deposits here up 2 10% since June last year. All of these initiatives saw us achieve a peer leading return on equity of 9.94%, up 65 basis points on the prior year. All of these figures show our multi year transformation journey really starting to bear fruit. And we're well placed to harness this increased momentum because we now have fundamental structures in place that allow us to take advantage of evolving market conditions and customer needs.
As a result, the Board's decided to pay an interim dividend of $0.125 per share fully franked, equivalent to a payout ratio of 67.6 percent, which is within the new 60% to 80% ratio we announced in August last year. Gary will take you through these numbers in more detail shortly. But it's important to note that these good figures were possible due to the trust our customers place in us because we're focused on their evolving needs and we're focused on those better than most of our competitors. We've also got an increased ability to attract new customers as a result. Last year, we welcomed 14,500 new customers as we continue to be one of the customer satisfaction leaders in the sector with a net promoter score of +40.
With a customer funding ratio now of a healthy 71%, we can comfortably support growth, managing our cost of funds in the most efficient way. Several initiatives during the period contributed to the results. They included introducing an artificial intelligence driven home loan retention tool to limit refinance and discharge requests. We enhanced our wealth businesses distribution by adding business development managers into Sydney and launched a new administration platform. Other savings also allowed us to increase marketing of our services along the eastern seaboard, particularly in Melbourne.
However, it's our digitization strategy, which has transformed my state into a digital scalable business and positioned us so well for the future. It's changed the way our customers interact for us, interact with our services and the continuing growth in online banking has enabled us to expand their online services, offer more intuitive and innovative products and reduce the number of branches we operate as we continue to digitize our services. Savings related to these initiatives will allow us to spend more time and more money on marketing and the ongoing digitization of the business continuing to drive further savings. And I'll touch more on this later. But for now, I'll hand over to Gary.
Thanks, Milos, and good morning, everyone. Moving to the results summary on Slide 6. Nearly all key financial metrics have moved positively compared to the previous corresponding half, and we remain pleased with the underlying momentum of the business in what has been a challenging, albeit more positive than expected external environment. As Milos has mentioned, pre provision operating profit or core earnings was up 18.8% on the prior comparative period. Total operating income was $68,600,000 up 8.5 percent on the prior comparative period with net interest income up 15% to $55,400,000 benefiting from balance sheet growth, disciplined margin management, a significant increase in retail deposits and lower wholesale funding costs.
Net interest margin for the half of 1.94% was up 6 basis points on the second half of FY 'twenty and was 12 basis points higher than the prior comparative period. Exit NIM in the month of December was 2.01%. That's despite a challenging environment with increased competition in the low risk owner occupied lending market with a loan to valuation ratio of less than 80%, which we target. Operating expenses, excluding restructure costs, increased 2.7%, excuse me, resulting in a significant widening of the positive jaws experienced in FY 2020. The cost to income ratio improved by 3 40 basis points to 61.5 percent with the benefits of process reengineering and automation driving improved operating leverage.
Net profit after tax was up 12.6%, benefiting from a higher average balance sheet relative to the previous corresponding half and the improvement in net interest margin. Earnings per share, as Milos mentioned, increased to $0.189 per share, and the company has resumed paying dividends with an interim dividend of $0.125 per share. MyState remains comfortably capitalized above regulatory minimums with a total capital ratio at 31 December 2020 of 13.24%. Slide 7 shows the key drivers of the increase in core earnings of 18.8 percent and the 12.6% increase in statutory net profit after tax after allowing for restructure costs incurred in closing 4 branches in Central Queensland and a reorganization of the TPT Wealth Business. As noted earlier, net interest income benefited from balance sheet growth, focused management of margin and reduced funding costs.
Wealth management income declined due to lower average funds under management, partly reflecting the impact of COVID-nineteen on investment markets in the Q2 of calendar year 2020 and lower trustee fees. Operating expenditure includes growth in technology and marketing spend and the uplifting capability required to expand our distribution footprint on the mainland of Australia. Net bad and doubtful debts benefited in the current period from a $400,000 after tax write back of the forward looking economic overlay due to the improved outlook for the Australian economy, including assumptions related to unemployment and house prices. The expense in the prior comparative period reflected the uptick in total and 90 day arrears balances in the home loan portfolio towards the end of calendar year 2019. Importantly, impairments overall remain at historic lows and arrears remain well below relevant 30 day 90 day benchmarks.
Slide 8 highlights that while we continue to operate in a highly competitive market, focused management of deposit rates and lending rates and lower wholesale funding costs have driven improvement in net interest margin of 6 basis points on the second half of FY 2020 and 12 basis points on the prior corresponding period. The RBA has reduced the cash rate by 140 basis points since early June 2019 with flow on effects to both the earning rate on assets and the cost of funding. While home loan margins remain under pressure, MyState Bank has benefited from the tailwinds of a continued fall in wholesale funding costs and the narrowing of the cash bill spread during the current half. Term deposit margins have continued to reduce as the book rolled to lower rates following the RBA cash rate changes. And our bonus saver account, as Milos mentioned, generated strong inflow in the half.
Retail deposit pricing continues to benefit from the heightened level of liquidity being held across the system as a consequence of COVID-nineteen and the broad package of initiatives implemented by the federal government to support the economy. As noted earlier, exit NIM in the month of December was 2.01%. And looking forward, we expect net interest margin to remain under pressure with competition in the home loan market intensifying, but with lower funding costs to provide some margin support. On the next slide, Slide 9, the chart on the top right hand side highlights that approximately 71% of our funding is sourced from customer deposits. During the half, we have seen as the market broadly has a switching customer preference from term to at call products.
Balances in our award winning bonus saver account have increased by 2 10% since 30 June. This fee free savings account has been awarded a 5 star rating by Canstar and received Mozo's Experts Choice Award. Following the branch closures in Central Queensland, we did see some customer attrition, predominantly in term deposits, with the majority of accounts lost immediately after the announcement was made in August. Securitization remains an important component of the funding mix and is expected to contribute 20% to 25% of the bank's funding for the foreseeable future. The conquest program has attracted strong and broad investor support over a number of years.
In September 2020, Moody's downgraded MyState Bank's investment grade rating from Baa1 to Baa2 following a change in their outlook for the Australian banking system, reflecting their view that COVID-nineteen will increase the strain on Australian Banks' operating environment and loan performance. The downgrade has had no subsequent impact on the bank's access to and cost of funding. Turning to Slide 10. Operating costs continue to be well managed. Underlying cost growth of 2.7% reflects ongoing investment in technology to build our digital capability and a significant increase in marketing to build awareness of our brand.
Marketing spend during the period has also contributed to customer acquisition, particularly retail deposits as we build the bank's franchise on Australia's Eastern seaboard. Digital marketing is enabling us to reach a broader population with new online and mobile products. Personnel costs in the second half of FY 'twenty benefited from the forfeiture of short term incentives due to the impacts of COVID-nineteen. We have also selectively grown distribution capability across Tasmania, Victoria and New South Wales and invested in leadership programs for the senior management team. In early August 2020, we announced MyState Bank's 4 Central Queensland branches and 2 branches in Tasmania would close, along with TPT Wealth Devonport branch and some rationalization of corporate office locations in Tasmania.
These changes were all implemented by 30 November and resulted in a one off restructuring cost of 2,500,000 comprising redundancy payments through impacted staff and the acceleration of depreciation of the right of use assets under Australian Accounting Standard, AASB 16, due to the early termination of leases in those areas. The expected annualized ongoing benefits of approximately $2,100,000 will be realized from the 1st January and will be reinvested in growth related initiatives across MyState Bank and TpT Wealth. There are now 7 branches continuing to service Tasmania with the broader Australian customer base serviced entirely via digital platforms and supported by the Tasmanian based customer care center and third party services such as those provided by Australia Post. Operating leverage within the business continues to improve with administration, governance and occupancy costs relatively flat since the first half of twenty nineteen. Turning to Slide 11.
We've maintained our focus on low risk owner occupied lending with a loan to valuation ratio of less than 80%, while also being a strong supporter of the 1st time loan deposit scheme. In the first half, the majority of reserves scheme places were funded, equating to approximately $280,000,000 of new home loan settlements. Total loan book growth was 5.5% in the 12 months to 31 December 2020, with the home loan book growing 6.2 percent or 1.7x system over that period. The chart on the bottom left hand side shows that both applications and settlements were up strongly on the prior corresponding period. The total lending book grew 1.7% during the half to approximately $5,400,000,000 at 31 December 2020.
We anticipate stronger bank balance sheet growth in the second half. The appendix shows the geographic distribution of our loan book continue to broaden with 38% of our loan book in Tasmania and 59% in the eastern states of Queensland, New South Wales and Victoria. As our loan book becomes more nationally representative, it reduces concentration risk, and we expect this trend to continue. Turning to capital on Slide 12. MyState remains well capitalized with all capital ratios comfortably above regulatory minimums.
The group's total capital ratio at 31 December 2020 was 13.24%. Our common equity Tier 1 ratio and Tier 1 ratio were 11.24%, well positioned to make the expected changes to APRA's capital standards. On 14 August 2020, $25,000,000 of Tier 2 qualifying subordinated notes issued by MyState Bank in 2015 were redeemed on the first available call date. These notes were replaced by 25,000,000 dollars of Tier 2 qualifying subordinated notes issued by MyState Limited on 10 July 2020, improving the group's overall regulatory capital efficiency by eliminating the minority interest haircut of approximately 20 basis points at a group level. As Milos mentioned earlier, the Board has determined to pay an interim dividend of $0.125 per share with the DRP activated at a 1.5% discount.
Given the expected level of loan book growth in the second half, we continue to explore a range of alternatives to further improve balance sheet efficiency. Moving to Wealth Management on Slide 13. You can see that funds under management grew 3.2% during the half and closed at just over $1,100,000,000 Revenue decreased by 15.9% with average funds under management approximately 8% lower than the prior comparative period, impacted by the COVID-nineteen induced fall in equity markets from their high point in mid to late February 2020 and investors who withdrew their money from both our income and growth funds to provide themselves with liquidity and certainty in uncertain economic times. Pleasingly, investors commenced reinvesting as confidence returned with strong net inflows into our income funds during the latest half. In addition, lower interest rates impacted returns, and directors elected to reduce the management fee on the Atkore fund in order to preserve investor returns.
This had the impact of reducing the management fee earned by TPT. The transformation of TPT Wealth continued in the half with investment management for the growth funds outsourced to Mercer. The business expanded the digitization of its services by implementing a cloud lending platform through which its lending capability can be broadened and the project to replace the legacy trustee system went live earlier this week. The significant change agenda is now broadly complete and will enable efficiency benefits as the business gains scale through the investment in distribution capability to drive growth on the Eastern seaboard, while remaining focused on the strong competitive position TpT Wealth commands in Tasmania. I'll now provide some further detail on our COVID-nineteen affected portfolio and the flow on impact to credit loss provisions.
The extent of COVID-nineteen related assistance provided to customers is summarized on Slide 15. MyState Bank has supported over 1900 customers through a range of measures, including loan deferrals, moving customers to interest only loans or by reducing minimum monthly repayments. At 15 February 2021, 199 customers remain on some form of assistance, with the majority being home loan customers, representing 0.8 percent of home loans by number and 1.6% of total home loan balances, down from a peak of 10.9% in June 2020. The majority of the assistance provided related to customers who opted to defer repayments, while a smaller number of customers moved to interest only payments or reduced their monthly repayment amount. Approximately 90% of customers who received assistance are now making some form of payment.
38% of home loans with COVID-nineteen assistance are in Victoria, and this represents 3.4% of the Victorian home loan portfolio. 2.4% of the New South Wales portfolio and 1.2% of the Queensland portfolio are receiving some form of assistance. In Tasmania, where the virus has been very effectively managed, only 0.5% of the portfolio is receiving assistance. We have reviewed each customer situation every 3 months, and we continue to work with our customers individually to arrive at the best outcome for each of them through this period. Turning to Slide 16.
At 30 June 2020, we assumed a slow and bumpy economic recovery and increased our collective provision and general reserve for credit losses by $4,000,000 at the end of the financial year. These changes were predominantly reflected in a forward looking economic overlay of $2,500,000 dollars and were based on our view of the potential impacts of COVID-nineteen at that time. The increase did not reflect any deterioration in our underlying credit quality or lending standards. At 31 December 2020, the outlook for the Australian economy is far more positive. GDP rebounded from 2 quarters of negative growth and was up 3.3% in the September 2020 quarter.
The national unemployment rate peaked at 7.5% in July 2020, was 6.6% at 31 December 2020 and as we saw yesterday, had dropped to 6.4% in January 2021. Finally, house prices nationally rose 2.3% in the December quarter and finished up 3% for the calendar year, recognizing some divergence across different states. However, we also recognize that most federal government stimulus measures such as JobKeeper are currently due to end on 31 March 2021. The reduction in the COVID-nineteen overlay at 31 December of $900,000 predominantly reflects the improved outlook for both employment sorry, for unemployment and house prices and the re weighting of probabilities to the upside relative to our views in June 2020. The appendix summarizes these key assumptions and the scenario weightings used at 31 December.
Of the $900,000 reduction, dollars 500,000 pretax was released to profit and $400,000 was reallocated to the core collective provision to recognize that some customers that had come off COVID-nineteen related assistance have now been transitioned to a restructured loan. Provision coverage ratios are shown in the chart on the right hand side as a percentage of both credit risk weighted assets and gross loans. It's worth reiterating that MyState Bank's loan book predominantly consists of high quality housing loans, the vast majority of which are owner occupied with a loan to valuation ratio of less than 80%. And as a consequence, we remain comfortable with the level of provisioning. I'll now return you to Milos to talk about our strategy and future outlook.
Thanks very much, Gary. So just turning to Slide 18, we can see some of the dynamics of the industry and the regulatory environment. The economy and consumer and business confidence are recovering more quickly and strongly than initially anticipated. As Gary indicated, unemployment rate national unemployment rate 6.4% for January and the Tasmanian unemployment rate the lowest in the country. Competition for new lending remained intense, although at the end of the government's assistance program at the end of March is creating some uncertainty.
Pressure on margins and therefore operating costs will likely continue requiring a need to balance cost efficiency and customer service. It's also clear that the industry dynamic is changing as evidenced by the rapid exit of some new to industry banks in recent months. We know customers are expecting more functionality from online and mobile banking, which we are well placed to provide with our online banking system and our artificial intelligence driven insights hub, which has been extraordinarily well received by our customers. We expect some societal changes we've seen in the last year will remain as the pandemic may have instilled a different set of values and austerity in our customers. Last year, we focused on supporting customers to help them through the financial impact of COVID-nineteen and we'll continue to do so as things play out further.
On the regulatory front, APRA and ASIC both have reactivated change agendas, which were paused during the pandemic. This is causing a wall of regulatory change to hit the industry. And we expect both regulators to continue their focus on culture, particularly risk culture and balancing the interests of different groups of stakeholders. Page 19 summarizes our strategy, which remains unchanged, aside from us looking at how we might accelerate our growth ambitions. This is led by increased investment in marketing and continuous improvement through digitization, automation and robotics and is underpinned by greater organizational capability whilst ensuring we maintain a very strong risk culture.
MyState Bank is focused on growing its balance sheet and increasing its digital capabilities and use of automation. We also intend to invest significantly and further build MyState Bank's brand to attract new customers and then deepen and nurture customer relationships to meet their evolving needs. CPT Wealth will continue to deliver contemporary, scalable wealth management and trustee products and services and grow through expanded Tasmanian and Mainland distribution. 4 enablers will help us do that. I've already mentioned marketing, but there's also increased process automation through our MyExcellence program, ensuring we match culture and capability across all staff and maintaining a strong capital position.
The heavy lifting restructuring of our banking and wealth businesses is now largely complete, and we can focus on realizing the benefits and reinvesting in growth. On page 20, we can see we've been moving over the past few years. As you can see, our customers are moving away from branch based transactions to digital transactions at a pace. We've managed to move with our customer base quickly and have the right focus at the right time to help them with digital transactions and the migration to the online banking. Having moved from a very, very low base a few years ago to a situation where most of our customers are now banking with us digitally and near half of our customers are receiving their statements digitally as well.
Whilst we clearly have more work to do in this space, we believe we are very well placed. We've developed award winning products and our digital banking that suits our customers, including a world class artificial intelligence driven insights package that allows customers to understand how they're spending their money and helps them to save more by the use of simple but sustainable techniques. It's much more sustainable for customers than rounding up copy money. We'll continue to focus on our customers' evolving interest and needs with ongoing investment in our digital capabilities. No matter what challenges life throws at our customers, we want to continue to earn their trust so we can continue to help them with their financial needs.
And finally, on Slide 21. On the revenue side, we expect MyState Bank's balance sheet will continue to grow. We're in the process of doubling the number of our bank business development managers in order to accelerate the growth of our balance sheet. We anticipate TPT Wealth's funds under management will begin to benefit from our increased distribution on the mainland. And whilst this will take time, we're already seeing some encouraging early signs.
We'll continue to reengineer our cost base, improving productivity and investing in further growth, particularly marketing. As mentioned earlier, we've done some recent significant reorganization in TPT Wealth and 6 bank branches were closed during the half. All of this is providing significant cost benefits and optionality going forward and thus more headroom to grow the business by selective and focused marketing spend. A higher marketing spend will enable us to increase MyState Bank's retail funding, supporting our net interest margin and growing TPT Wealth's funds under management. As I said, TPT Wealth's legacy trustee system has now been replaced and progress is being made on further product differentiation.
6 years ago, we adopted a strategy to transform MyState into a highly scalable digital banking and funds management business. The operational efficiencies and the improvements we've made since then are now flowing through the bottom line and setting us up for a very bright future. We're well positioned and primed to now really accelerate our growth and see a huge opportunity for us to drive the business at a much faster pace. Thank you for your time. And I'll now hand back to the operator who will introduce any questions that you may have.
Thank
you.
Our first question is from Nathan Zyer of Morningstar. Please go ahead.
Good morning, gents. Thanks for taking my questions. The first one I had was on the growth in the above 90% LVR bucket. I know the first time loan deposit scheme is driving that. But loan balances with LVR below 80% have actually fallen in dollar terms as well.
Is that just reflective of competition? Or is there anything else to note like the branch closures have any impact?
I don't think branch closures had an impact there, Nathan. It's really the influence of accelerated repayment. So as interest rates came down through the back end of last calendar year, customers have just taken the opportunity to pay down balances quickly. And so as a proportion of the loan book, we've just had that change. We're expecting that to change in the period going forward as we originate more into that bucket in the near term.
Okay. Fair enough. And can I just check, Gary, did you say, is that over the last 12 months, dollars 280,000,000 of loans was in the first time loan scheme?
Yes. That's right, Nathan. Out of yes. And you've got the settlements and applications data in that chart on Slide 11.
Yes. Okay. So it is a big chunk of the growth. I was just also curious, does that have much of an impact on NIM? Like is that priced materially higher?
It is priced higher than the sort of average equivalent product. So it does have a positive impact on NIM.
Not a number you can call out though or?
It's about 10 basis points, I think, from memory.
Okay.
Yeah. It's it's it's priced 10 basis points higher than effectively the basic product that we have, Nathan.
Okay. And so that's the basic product, but what about that average that you're actually getting? Like, that's 10 basis points on an advertised rate? Like, I'm just more interested at the impact on the actual your average NIM on your book.
I mean, the impact of the first time loan deposit schemes on NIM is not going to be material.
Okay. All right. And the only other thing, like loan growth, obviously, still growing strongly in above system, but that rate above system slowed and Bendigo noted competition in the broker channel. Are you still seeing opportunities to continue to take share? Or does it feel like some of the majors have got their house in order a little bit now?
We see quite significant opportunities to take share. Hence, the reason for doubling our number of business development managers. So rather than try and compete on just on price, we're competing more on service as well. Our average time to from application to conditional approval still running at 2 days or less. That's a huge focus of ours.
So we see opportunities in the market for us to re kick our growth to the rates that we were seeing in previous years as well, despite the fact that it's a competitive market. But it is what it is. We're not competing at the sharp end of price, but we have to be there in order to get new customers. But we just we do see with some of the dislocation in the market quite large opportunities for someone like us to make some make a real difference in the market in the period ahead.
Okay. And if I can just squeeze one more in. I don't know if it's in the present, excuse me if I missed it. But in the deferred loans, can you give us an idea of how much those balances have in LVR above 90%?
Yes. It's in the presentation, Nathan. So if you have a look at slide that's okay. If you have a look at Slide 15, we've got the data there at June and Feb. So at the 15th of Feb, it was around 13%.
Yes. Okay. Apologies. All right. Thanks for that.
Congrats on a great result, guys.
Okay. Thanks, There
are no further questions at this time.
Yes. Thanks very much, Ari. Well, I'd just like to thank everybody for your time and attention today and for your interest in MyState. Look forward to catching up with a few more of you over coming days in the week to talk to the results in more detail. Thank you.
Have a great day and a great weekend.
Thank you. That concludes today's call. You may now disconnect your lines.